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Will China price rise lower oil demand?

A billboard showing fuel prices at a gas station in Beijing.

TEXT OF STORY

BOB MOON: Another day, another gyration in oil prices. They're back up to around $134 a barrel, after falling yesterday on news of that big jump in Chinese gasoline prices. Beijing lifted some subsidies on domestic fuel, allowing prices to get closer to market rates. The theory had been that such a move would cut demand in China, and allow global prices to ease off. But as Jeremy Hobson reports, we should all know by now what happens when we start assuming anything about oil prices these days.


JEREMY HOBSON: China has the world's fastest growth in oil demand. And bumping up the price was supposed to be a good-faith effort aimed at denting that demand right before this weekend's meeting of the big oil players in Jeddah, Saudi Arabia.

But Phil Flynn, a senior market analyst at Alaron Trading in Chicago, isn't convinced it worked.

PHIL FLYNN: Some people are not sure that this increase in price in China is gonna be enough to curtail demand. In fact, some people believe that it will actually increase demand.

And even if it does curtail demand, says Ruchir Kadakia with Cambridge Energy Research Associates, we won't know it for some time. And that's why traders are moving on.

RUCHIR KADAKIA: Trends in supply and demand take much, much longer to float through the market, simply because consumer behavior doesn't change over night. But geopolitical shocks -- events that are happening in Nigeria or the middle east -- those geopolitical impacts are going to be much more volatile and have much more significance in the market.

He says that's because the global supply-demand balance is so tight on a daily basis, there is very little wiggle room. Today, for instance, oil prices were driven up by news that a military exercise Israel conducted earlier this month could have been a test run for an attack on Iran.

As Phil Flynn on the trading floor in Chicago puts it:

FLYNN: This market is living headline to headline and they're doing that because they're worried about this tight, spare production capacity in the world.

And Flynn says, in the end it comes down to a general worry in the market. No one really knows how much oil is left.

In Washington, I'm Jeremy Hobson for Marketplace.

About the author

Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead.
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The sign in the photo, with gas prices at 5.68 looks impressive. But 5.68 Chinese yuan is a little more than 82 cents if my calculations are correct.

You reported that “Beijing has lifted some subsidies on domestic fuel on the theory that such a move would cut demand and allow global prices to ease off.”

My theory is that the major effect will be on supply not demand. Beijing can only afford to spend so much on fuel subsidies, so now that the per gallon subsidy is reduced they can afford to subsidize more gallons.

So since oil is a zero sum game more oil in China means less oil somewhere else which means even higher prices ahead.

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